The first step is to imagine yourself taking a seat at an elegant Indian Thali. In front of you are several little bowls filled with spicy curries, comforting dal, cool curds, and crunchy papads.
At once, you notice that there isn’t just one dish defining the entire meal. It’s the variety of dishes combined together that create the perfect harmony. A similar principle applies in investing when it comes to using asset allocation as a means to guide a successful wealth-building experience.
Asset Allocation — A Recipe for Success
As with any great meal, a good Thali offers texture and flavor. A balanced portfolio will have its own blend of risk and reward. An investor who has a high level of equity or "spicy curry" within his/her portfolio has the potential to offer tremendous growth, however, he/she may also have the potential to overwhelm themselves by consuming too much of it.
On the other hand, investors who rely heavily upon debt ("comforting dal") provide themselves with consistent returns. Gold ("cooling curd") helps protect both the palate (capital) from the volatility found in markets during times of extreme turmoil.
Much like how leaving out one component of a Thali would leave your taste buds wanting, skipping an asset class could potentially harm your future financial success.
Portion Control and Your Individualized Risk Tolerance
Additionally, each person’s Thali is going to look slightly different depending upon what they need. An example of this is an athlete who will consume far greater amounts of protein than a child consuming smaller portions of milder food. Ultimately, the size of each serving depends entirely upon your age, time horizon and specific financial objectives.
Younger individuals with longer time horizons may want to skew their investments towards equities (spicy curry) to achieve faster growth. Older individuals nearing retirement will likely opt for safer investments such as fixed-income securities and/or cash (dal & rice). When you prepare your personalised plate, you can avoid eating too much of anything financially speaking.
Seasoning Rebalance
In addition, even the most effective recipes periodically need some adjustments. Over time, one asset class may become overly dominant in a portfolio similar to how a curry becomes too salty after simmering for an extended period of time.
To help prevent this from occurring, regular portfolio rebalancing is needed. This process requires selling off assets that have grown beyond your desired amount, while simultaneously purchasing those that are currently lagging behind.
Through this consistent practice, you are able to keep your original investment recipe intact and your associated risk level controlled.
All in all, a well-planned portfolio is very much like a perfectly prepared Thali – it is well-balanced, enjoyable and prepared according to your exact tastes. Begin creating your own financial plate today so that you can enjoy a prosperous feast tomorrow!
Need help to create your perfect investment thali? Contact our Relationship Manager today.
